What Is a Discriminating Monopoly?
A discriminating monopoly is a market-dominating company that charges different prices—typically, with little relation to the cost to provide the product or service—to different consumers.
A company that operates as a discriminating monopoly by using its market-controlling position can do this as long as there are differences in price elasticity of demand between consumers or markets and barriers to prevent consumers from making an arbitrage profit by selling among themselves. By catering to each type of customer, the monopoly makes more profit.
- A discriminating monopoly is a monopoly firm that charges different prices to different segments of its customer base.
- An online retailer may charge higher prices to buyers in wealthy ZIP codes and lower prices to those in poorer regions.
- By targeting each type of customer, the monopoly is able to earn a greater profit.
- Price discrimination is only achieved through the firm’s monopoly status to control pricing and production without competition.
How Discriminating Monopolies Work
A discriminating monopoly can operate in a variety of ways. A retailer, for example, might set different prices for products that it sells based on the demographics and location of its customer base. For instance, a store that operates in an affluent neighborhood might charge a higher rate compared with one located in a lower-income area.
The variances in pricing may also be found at the city, state, or regional level. The cost of a slice of pizza at a major metropolitan location might be set to scale with the expected income levels within that city.
Pricing for some service companies may change based on external events such as holidays or the hosting of concerts or major sporting events. For example, car services and hotels may raise their rates on dates when conferences are being held in town because of the increased demand caused by an influx of visitors.
Housing and rental prices can also fall under the effects of a discriminating monopoly. Apartments with the same square footage and comparable amenities may come with drastically different pricing based on where they are located. The property owner, who may maintain a portfolio of several properties, could set a higher rental price for units that are closer to popular downtown areas or near companies that pay substantial salaries to their employees. The expectation is that renters with higher income will be willing to pay larger rental fees compared with less desirable locations.
Example of a Discriminating Monopoly
An example of a discriminatory monopoly is an airline monopoly. Airlines frequently sell various seats at various prices based on demand.
When a new flight is scheduled, airlines tend to lower the price of tickets to raise demand. After enough tickets are sold, ticket prices increase and the airline tries to fill the remainder of the flight at the higher price.
Finally, when the date of the flight gets closer, the airline will once again decrease the price of the tickets to fill the remaining seats. From a cost perspective, the breakeven point of the flight is unchanged and the airline changes the price of the flight to increase and maximize profits.
Can Any Company Operate as a Discriminating Monopoly?
No. Price discrimination is generally only achievable when the entity serves different market segments with varying price elasticities and faces limited competition. After all, hiking prices for some customers is only likely to have the desired effect if nobody else is charging less for the same product or service.
It is possible that multiple rival businesses implement similar pricing strategies based on location and general industry demand. However, the risk here is that competitors will constantly attempt to undercut each other to secure more business.
What Are Some Common Examples of a Discriminating Monopoly?
Discriminating monopolies are a regular fixture in our daily lives. For example, stores, restaurants, and property often tend to cost more in areas where there is a higher population of affluent people. If a company can get away with charging more, there’s a decent chance that it will do so.
Is Price Discrimination a Profitable Strategy?
For a discriminating monopoly to work, the profit earned from separating markets must be greater than if the same prices were applied to everyone. In theory, matching prices to specific areas of a company’s customer base is a great way to maximize profits. However, if such a strategy is not carefully monitored and managed, and the right conditions don’t exist, then it could easily backfire.